Estate Tax Planning

Estate Tax Planning

For most families, having a well-thought out, but basic estate plan consisting of power of attorney documents, a simple pour over will, and a revocable living trust covers everything that family needs. However, for higher net worth families, there are the added complexities of dealing with estate tax issues. Estate taxes are only an issue if the person passes away has an estate larger than the estate tax exemption. Currently, this exemption is equal to over $5,430,000. This means that only a few percentage points of all Americans will have an estate tax issue. However, there is much uncertainty regarding what this exemption amount could be in the future. For example, barring further action by Congress, this exemption will shrink by over 80% (to $1,000,000) on January 1, 2013. Even if Congress decides to enact some legislation to avoid returning to this lower amount, there is still a great possibility that the new legislation will only “patch” the problem for a few years.

Advanced estate planning (and/or estate tax planning) is extremely technical. There is very much a cat and mouse game played between taxpayers and the IRS where most individuals want to keep control of money/property, but also don’t want to pay any extra taxes because they had this money upon their death. The IRS will allow people to “transition” money outside of their reach as a valid way to reduce or eliminate estate taxes- however, the IRS can also be very sticky about just how closely the individuals followed the rules that allow these types of transactions. If you aren’t getting high quality advice, that you implement exactly as directed by the attorney, and the plans aren’t continuing to be reviewed for effectiveness on a regular basis, there is a good chance the planning will not be respected by the IRS. This is not a DIY area- mistakes can easily cost hundreds of thousands of dollars, and often much more. Below are a few examples of tax planning ideas that can be useful.

Family Limited Partnerships

These are devices that can be very handy to slowly transition management and control over real estate, small business, and other assets to the next generation. While many families put family limited partnerships (FLP) together for primarily non-tax reasons, they can be very effective tools to also significantly reduce the value of the estate because of the restrictions put on the property through the partnership. It is not uncommon at all for a family to see at least a 35% reduction in the valuation of partnership assets. This can easily lead to savings of over $100,0000. The key feature on a family limited partnership is that the senior is going to be giving up some (or most) of the control over the assets.

Irrevocable Life Insurance Trusts (ILIT)

Many people are aware that life insurance proceeds are tax free. However, that is only referring to income taxes. Life insurance proceeds are most definitely included in the person’s gross estate when figuring out if they owe estate taxes. An irrevocable life insurance trust (ILIT) is a way to remove the insurance policy (and the death proceeds of that policy) from the deceased’s taxable estate. Often, the parent will create this trust, place an insurance policy into this trust, and then continue to pay the premiums on the policy through the use of a “Crummey Power.” A Crummey Power makes sure that the senior family member can pay the annual premiums (through the trust) without incurring gift taxes each year when they contribute the money to pay the insurance policy proceeds.

ILIT’s can be used as an effective way to pass significant wealth to your kids and grandkids without having to pay estate taxes. In the event that estate taxes are inevitable, then an ILIT can be a great source of funds to pay these taxes without the insurance proceeds adding to the amount of taxes already owned.

There are many other strategies that can be used to eliminate or reduce estate taxes. These can include charitable remainder trusts, charitable lead trusts, grantor retained annuity trusts, sales to intentionally defective trusts, to name a few. For families that have estate tax issues , these tools can be very effective, but are also only appropriate in certain factual situations. For high net worth families, the importance of having advisors (including your estate planning attorney) to help design and implement these plans cannot be overstated.

Using Trusts for Asset Protection

Trusts can also be used as an effective tool for asset protection, either for you and your spouse, or your children. For you and your spouse, Missouri law allows for the creation of “Qualified Spousal Trusts.” This allows for assets in a joint trust, that previously would not have the legal protection of tenants by the entirety, to enjoy this protection. Tenants by the entirety means that only a marital debt (i.e. the mortgage that both husband and wife agreed to pay) can attach to the asset, as opposed to the debts of just one spouse (if a business owner gets sued). This added protection makes joint trusts even more popular. It is also possible with this type of trust for the trust to be revocable, and the husband and wife to have total access to the funds at any time they want.

There are also various types of irrevocable trusts that will be completely exempt from claims of virtually all creditors (such as ex-spouses, medical bills, credit card debt, etc.). These trusts are separate entities from the beneficiary (whether the beneficiary is the same person who created the trust, or someone else). Since they are separate, it is not possible for that creditor to reach into the trust and pull money out against the wishes of the beneficiary. With a divorce rate in excess of 50%, it is easy to see why protecting the inheritances left to your children can be money well spent.

The Weeks Group will listen to your estate planning/asset protection planning goals and develop a plan that best fits your individual situation. Contact the Weeks Group today to get started on your estate plan!

FAQs

Will my Estate be Subject to Death Taxes?

Two types of death taxes should raise concern: the federal estate tax and state estate taxes. The federal estate tax is figured as a percentage of your net estate. Your net taxable estate is comprised of all assets you own or control minus specific deductions. The federal estate tax currently taxes estates with assets of $5,430,000 or above.

What is my Taxable Estate?

Your taxable estate combines the total value of your assets including your home, other real estate, business interests, your share of joint accounts, retirement accounts, and life insurance policies – minus liabilities and deductions such as funeral expenses paid out of the estate, debts owed, bequests to charities, and value of the assets passed on to your spouse. The taxes imposed on the taxable portion of the estate are then paid out of the estate itself before distribution to your beneficiaries.

What is the Unlimited Marital Deduction?

Unlimited marital deduction is a provision in United States Federal Estate and Gift Tax Law that allows an individual to transfer an unrestricted amount of assets to his or her spouse at any time, including at the death of the transferor, free from tax. The unlimited marital deduction is considered an estate preservation tool because assets can be distributed to surviving spouses without incurring estate or gift tax liabilities. The unlimited marital deduction is only available to surviving spouses who are United States citizens.

What is a Credit Shelter or A/B Trust & How Does It Work?

A Credit Shelter Trust, also known as a Bypass or A/B Trust is used to eliminate or reduce federal estate taxes and is typically used by a married couple whose estate exceeds the amount exempt from federal estate tax. For example, in 2015, every individual is entitled to an estate tax exemption on the first $5.43 million of their assets. A Credit Shelter Trust establishes an irrevocable trust with a deceased spouse’s share of the trust’s assets. A surviving spouse is the beneficiary of this trust, with the children as beneficiaries of the remaining interest.

What is a Qualified Personal Residence Trust (QPRT)?

Our homes are often our most valuable assets and one of the largest components of our taxable estate. A Qualified Personal Residence Trust or a QPRT (pronounced “cue-pert”) allows you to give away your house or vacation home at a great discount, freeze its value for estate tax purposes, and still continue to live in it.

What is an Irrevocable Life Insurance Trust & How Does It Work?

An Irrevocable Life Insurance Trust keeps the death benefits of your life insurance policy outside your estate so that they are not subject to estate taxes. There are many options available when setting up an ILIT. For example, ILITs can be structured to provide income to a surviving spouse with the remainder going to your children from a previous marriage. You can also provide for distribution of a limited amount of the insurance proceeds over a period of time to a financially irresponsible child. A benefit of using an ILIT is that a trustee can be chosen who understands the goal of providing liquidity for payment of taxes, and in that way there is more certainty that the proceeds will be used for the intended purpose, at the insured’s death.

What is a Family Limited Partnership & How Does It Work?

A Family Limited Partnership (FLP) is a form of limited partnership among members of a family. The primary advantage of forming and funding an FLP is asset protection. An FLP allows you to retain control over family assets while avoiding excessive estate and gift taxes.Within the limited partnership, general partners control management and limited partners are merely investors. General partners are personally liabile for partnership obligations, while limited partners have no liability beyond their capital contributions. Typically, a Family Limited Partnership is formed elder family members who contribute assets to the partnership in return for a small general partnership interest and a large limited partnership interest. Then the limited partnership interests are transferred to their children and/or grandchildren, while retaining the general partnership interests that control the partnership.

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